'Don't Do It,' They Tell Us, as They Rush to Exit

It has become one of the great peculiarities of this long bull market in stocks that whenever prices have plunged, Wall Street has issued a stern warning:

If millions of individual investors finally decide to take some profits, they could seal the market's fate, guaranteeing a horrendous bear decline.

So, paraphrasing one of Sen. Bob Dole's favorite lines from the last presidential campaign, many analysts have implored individuals: "Just don't do it!"

Which is becoming more irritating than amusing as stock prices continue to crumble.

We're told by mutual fund companies that individuals, for the most part, aren't selling. Well, somebody is selling--and not insignificant sums, judging by last week's wild plunge in U.S. and foreign shares.

The Dow Jones industrial average lost 411.43 points, or 5.1%, for the week, bringing its loss thus far from its July 17 record high to a stunning 1,697 points, or 18.2%.

A cynic would say that Wall Street is trying to encourage Ma and Pa to hold on to their stocks as long as they can--long enough, that is, to allow certain institutional investors to get out before a much deeper decline ensues.

Everyone knows the situation is getting serious in the global economy, as the terrible financial-market virus that began in Thailand 14 months ago has spread across East Asia, entered Russia, crossed the ocean to Latin America and--finally, by last week--was ravaging the investments of average Americans.

It must be getting worse, because last week the Sphinx finally spoke: Federal Reserve Chairman Alan Greenspan on Friday gave a speech in which he acknowledged that the Fed must consider the "potential ramifications of ongoing developments."

Hello?

In Greenspan-speak, that might be construed to mean the Fed will consider cutting short-term interest rates to avoid global calamity.

But the market already is way ahead of the Fed, as has been duly noted here and elsewhere. The Fed's benchmark short-term interest rate, the federal funds rate, is at 5.5%. But investors today are willing to accept just 5.28% on a 30-year Treasury bond.

The bond market, it seems, figures the Fed is just late to the party.

What has been troubling more than a few Wall Streeters is that, while Treasury rates have fallen, the stock market has not viewed that development with its usual unfettered glee.

Which is just another sign of how worried people have become, and why this stock market sell-off is different from all of the more minor sell-offs that have occurred in this nearly 8-year-old bull market.

Greenspan--who, by the way, on July 22 uttered that a stock market "correction of some significant dimension" was inevitable (he didn't say when)--was perhaps more candid than usual on Friday when he warned that, "Clearly, the history of large swings in investor confidence and equity premiums for rational and other reasons counsels caution in the current context."

How bad could it get? We know that since 1946, bear markets have slashed 29.4%, on average, from the blue-chip Standard & Poor's 500 stock index. So far, the S&P; is down 18% from its July 17 peak.

We also know that blue-chip stocks, at least, still aren't screamingly cheap, with the S&P; index's price-to-earnings ratio at 21.5 based on the most recent 12 months' earnings per share.

But in many market sectors, there is full-scale panic selling going on. That's the case in emerging markets, obviously, in their stock and bond issues alike.

It's also the case in the U.S. small-stock market, where prices just seem to be falling like bricks. But it's hard to tell whether people really are selling the stocks at these levels, or whether Wall Street dealers simply are frantically marking down prices so that no one hits their advertised "bids" and forces them to take shares.

For individual investors, the best advice is still the oldest advice:

* Protect the money you absolutely can't afford to lose. Stocks can lose 80% of their value, but bonds rarely do. Even in 1994, a terrible year for bonds as interest rates rose, the average long-term government bond fund lost just 4.6%. What's more, today's yields on bonds and other more conservative investments may not look like much, but they're historically high adjusted for low inflation.